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The Adam Smith Institute Blog

How much money buys happiness?

Money can't buy happiness? Don't tell that to the authors of a new study that calculated just how much income will maximize happiness.

By Tim WorstallGuest blogger / September 13, 2010

In this studio handout, actress Marilyn Monroe, who famously sang that 'Diamonds are a girl's best friend,' stands bedecked in jewelry. Economists at the Adam Smith Institute claim to have calculated just how much money buys happiness.

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It's not surprising that some say that ever more money, ever more shiny things bought with it, starts to wear off after a bit. We don't get happier and happier as the income piles up: diminishing marginal utility of anything really is a truism about humans and the world. However, having said that we then need to try and work out how much will maximise happiness. There are always those who tell us that it is less than we already have and even serious people like Richard Layard think it's around $15,000 a year (as well as non-serious people like the authors of The Spirit Level).

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It would appear though that they are wrong:

Now we have more details from the study, conducted by the Princeton economist Angus Deaton and famed psychologist Daniel Kahneman. It turns out there is a specific dollar number, or income plateau, after which more money has no measurable effect on day-to-day contentment.

The magic income: $75,000 a year. As people earn more money, their day-to-day happiness rises. Until you hit $75,000. After that, it is just more stuff, with no gain in happiness.

No, that doesn't mean that we can then have a 100% tax on incomes above that: for that would reduce economic growth, as we know. And economic growth is what we need. For the current average income across the world is between $7,000 and $8,000 (that's what we would get if all GDP were equally shared). So in order for all to be at that very peak of happiness we need the global economy to be some 10 times larger than it currently is.

Hmm, anyone have a plan as to how we might achieve this? Well, actually, yes, the International Panel on Climate Change, the IPCC does. Their economic models (upon which the whole thing is based) include one in which global GDP in 2010 is $550 trillion, around 11 times what it was back in the 1990s. And what are the driving forces of this economic scenario? More globalisation, more free markets, more markets of every type and gobs and gobs of economic freedom: you know, the essential neo-liberal policy package.

Their other economic models, which drop either the globalisation or the markets (and in one case, both) don't manage to get anywhere near this result: that joyous trio of abolishing absolute poverty, reducing global inequality and producing sufficient wealth that all can be as happy as this research has found it is possible to be.

Strange but true: the secret to maximising human happiness is global free market capitalism.

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